Investments That Aren’t Allowed in Self Directed IRAs

Estimated reading time: 3 minutes(Last Updated On: January 14, 2020)

One of the major benefits of having a self-directed IRA is the wide array of investment options that become available to you. In normal IRAs your investment options are mostly limited to stocks, bonds, mutual funds and CDs. With self-directed IRAs, however, in addition to the traditional investment options, things like real estate, notes, private placements, and many other investments become available. However, there are still limitations to possible investments in order to stay within IRS guidelines. A few of the investments that are not allowed are covered below.

Collectible items are not permitted in IRAs for a few different reasons. Generally speaking, collectibles do not raise in value enough to become a benefit in retirement funds. The risk outweighs potential benefits. So, things like comic books, stamps, wine, antiques, and other popular collectible items are not considered reliable assets. In order to protect investors and their retirement funds, the IRS excludes these items from IRA investments.

Term life insurance is a cash value insurance which means you don’t actually earn anything from it. For this reason, it is not able to be invested in self-directed IRAs. They don’t hold any financial benefits, so they wouldn’t do anything to aid your retirement funds, which defeats the purpose of investing. Whole life insurance on the other hand is able to generate an income over the years. However, you would lose the tax-benefits that they already have by putting them in a self-directed IRA.

The home you’re living in is not allowed because, according to the IRS it becomes a conflict of interest. If you were to invest your own home you would basically be renting it to yourself. You’d lose several financial benefits that you get for owning your own residence, so financially it is better to leave it out of a self-directed IRA anyway. You are, however, allowed to invest in other real estate as it can raise in value for your retirement fund. This is a good option if you’re planning on buying a retirement house because you can invest it and rent it until you are ready to live in it after reaching retirement age.

Personal loans are a bit more complicated when it comes to self-directed IRAs. Loans from your IRA account work similarly to normal bank loans where interest and repayment schedules are concerned. However, the IRS does not allow loans to be made to people with whom you have a personal connection to, as it can pose a risk to your retirement account. This includes family members and close friends.

While these are some of the main investments to avoid in self-directed IRA, there are other investments that are more conditional that are important to be aware of. With investments like precious metals and derivative contracts, there are more stipulations that go into what can or cannot be invested. So, if you’re considering any of those options it’s important to do some additional research so you remain compliant with the IRS and don’t miss out on any of the tax-advantages that IRAs offer.

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